BAT Profit Rises 11%, Steps Up Buybacks

By Matthew Boyle -
Feb 23, 2012

British American Tobacco Plc (BATS),
Europe’s largest cigarette maker, said it will step up a buyback
program this year by repurchasing 1.25 billion pounds ($2
billion) of shares after profit rose 11 percent in 2011.

Directors of the Lucky Strike maker approved an extension
of the buyback after BAT spent 750 million pounds repurchasing
stock last year, the company said today in a statement. BAT also
raised the dividend by 11 percent to 126.5 pence a share.

The tobacco company resumed the buyback program last year
after a two-year break caused by the recession. About 94 percent
of free cash flow will be returned to shareholders this year
through dividends and share repurchases, spokesman Michael Prideaux said. Cash flow increased by 3 percent in 2011 to 3.33
billion pounds, BAT said today.

“It’s a surprise to me, as I was expecting a renewal of
750 million,” said Martin Deboo, an analyst at Investec
Securities. “Yet despite distributing all the cash they’ve got,
it’s not enough to get the share price up and raises the
question of how much further tobacco stocks can go.”

BAT fell as much as 1.1 percent in London trading and was
down 0.5 percent at 3,117 pence as of 9:06 a.m. The stock has
gained 29 percent in the past year, compared with the Bloomberg
Europe Tobacco Index’s (BETOBAC) 28 percent advance.

‘Strong Balance Sheet’

The proposed buyback is the equivalent of a 2 percent stake
based on a market value of 61.5 billion pounds, according to
Bloomberg calculations. Competitor Philip Morris International
Inc. said Feb. 9 it would repurchase as much as $6 billion this
year, or a 4.2 percent stake.

“We thought that in the current economic climate we could
do this buyback and keep a strong balance sheet,” BAT’s
Prideaux said.

Adjusted operating profit climbed to 5.52 billion pounds in
2011 from 4.98 billion pounds in 2010, the London-based company
said today. The average estimate of 11 analysts surveyed by
Bloomberg was for operating profit of 5.51 billion pounds.

BAT, led by Chief Executive Officer Nicandro Durante, has
pushed into developing markets in Asia and Latin America to
mitigate declining consumption in the Americas and higher
government levies as countries discourage smoking. In October,
the company acquired Productora Tabacalera de Colombia SAS to
become the second-largest tobacco seller in the country.

“BAT is an attractive indirect emerging-market play and
benefiting from favorable trends in terms of volume and
pricing,” Rogerio Fujimori, an analyst at Credit Suisse with an
“outperform” recommendation, wrote before the release.

Wider Margin

BAT’s operating margin widened to 35.8 percent of sales
from 33.5 percent in 2010, compared with the company’s forecast
of at least 35 percent. BAT has boosted margins by cutting costs
and raising prices in countries including Brazil, Mexico and
South Korea. David Hayes, an analyst at Nomura, estimates an
operating margin of 37 percent in 2012, he said in a note today.

Emerging markets such as Brazil now account for about
three-quarters of total volume, up from 50 percent a decade ago,
and 60 percent of operating profit, Prideaux said. BAT sees more
acquisition opportunities in developing markets, he said.

“The most important thing is that the global drive brands
continue to increase as a proportion of overall volume,” said
Chris Wickham, an analyst at Oriel Securities who recommends
holding the shares. “Those brands are really going.”